Encouraging Data, but Uncertainty Persists

The past week brought a series of positive surprises for the U.S. economy: inflation continued to show signs of moderation, consumer sentiment rebounded for the first time this year, and the labor market remained broadly stable, with unemployment holding at a healthy 4.2%. Still, for every sign of resilience, there remains a cloud of uncertainty—particularly regarding tariffs, their impact on prices, and the ultimate response of Federal Reserve policymakers.

The Fed’s “Wait and See” Stance: No Immediate Rate Cuts Expected

Despite the improving macro data, Wall Street strategists and Federal Reserve watchers agree: it is logical for the Fed to wait before moving to cut interest rates. Loretta Mester, former president of the Cleveland Fed, told Yahoo Finance that although “hard” data on jobs and inflation have been encouraging, “the real question is what will happen in the second half of the year and whether these trends will continue. There’s still a high degree of uncertainty there.”

Fed Chair Jerome Powell has repeatedly stressed that monetary policy will remain cautious, especially given the lack of clarity around the impact of new tariffs imposed by President Trump and their potential effects on consumer prices and overall growth.

Tariffs and Trade Deals: The Core of Uncertainty

One of the key reasons for the Fed’s caution is the scope and scale of recently introduced tariffs under President Trump’s “Liberation Day” policy. While some retaliatory tariffs have been suspended, a base 10% tariff remains in effect for most countries, and sector-specific tariffs on steel, aluminum, and automobiles are unchanged. A recent truce with China established a framework for reducing some trade tensions, but the deal still leaves a 55% tariff on Chinese goods—a historic high.

Analysts point out that the new agreement with China remains vague, with many details left unresolved. The impact on supply chains, import prices, and inflation in the U.S. is still unknown. As long as uncertainty persists regarding the inflationary effect of tariffs, the Fed is expected to maintain its “wait and see” stance on monetary policy.

Labor Market and Inflation: Signs of Cooling, but Not Enough

While labor market indicators remain solid, there has been a slight uptick in continuing jobless claims—a possible sign of a mild slowdown. Wage growth has also started to moderate. Strategists like Brent Schutte, chief investment strategist at Northwestern Mutual, argue that “any rate cut before September would likely require significant deterioration in the job market.” He notes that the true impact of tariffs on inflation may not show up in the data for several months, making it too early to declare victory on price stability.

Schutte and others caution that inventories built up by importers and businesses in anticipation of tariffs, along with adjustments by consumers, may be temporarily masking the real effects of higher tariffs on inflation numbers.

Market Expectations: Is a September Rate Cut Likely?

As of now, around 70% of investors expect the Fed to begin cutting rates in September—up from 60% last week. The probability of a cut as early as July is only about 25%, with markets largely pricing in no change at the next policy meeting.

Economists such as Ryan Wang at HSBC warn of “two-sided risks”: commodity prices are likely to continue rising in the coming months, but early signs of a cooling job market could put downward pressure on inflation. The Fed, Wang says, will need clear evidence that inflation is not accelerating “out of control” and that the broader economy is not slowing too quickly before it can move forward with cuts.

The Tariff Effect: Potential Delays and Inflation Risks

Another complicating factor is the lagged impact of tariffs. Some on Wall Street argue that the inflationary effects of tariffs are often delayed, as inventories are drawn down and businesses and consumers adapt. “People say maybe tariffs won’t be inflationary, but it’s too early to decipher that,” Schutte says. “Often, it takes time for those numbers to show up in the data.”

Until the true inflationary effect of tariffs becomes apparent and the labor market weakens significantly, Fed officials are likely to remain on hold—potentially until September or beyond.

Conclusion: The Fed Is in “Wait and See” Mode

Despite encouraging economic data, the Federal Reserve appears committed to a patient approach, waiting for more clarity on inflation, the labor market, and the real-world impact of new tariffs and trade deals. While market participants are increasingly betting on a rate cut by September, Fed officials remain cautious, emphasizing the need for data-driven decisions amid persistent global uncertainty. Unless there is a pronounced deterioration in economic conditions, the Fed is likely to keep rates unchanged in the near term.